Partner Communications Company Ltd.
Q3 2014 Earnings Call Transcript

Published: 12 Nov 2014

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications’ Third Quarter 2014 Results Conference Call. All participants are at present in a listen-only mode. [Operator Instructions] following management’s formal presentation instructions will be given for the question-and-answer-session. As a reminder, this conference is being recorded. I would now like to turn the call over to Mr. Gideon Koch. Mr. Koch, please begin?

[Gideon Koch:]

Thank you. And thank you to all our listeners for joining us on this conference call to discuss Partner Communications' third quarter results for 2014. With me on the call today is Haim Romano, Partner's CEO; and Ziv Leitman, our CFO. Haim Romano will first present an overview of Partner’s strategy and plans for the future. Ziv Leitman will then provide a more detailed explanation of the financial and operational results for the third quarter. And finally, we will move on to the Q&A. Before we begin, I would like to draw your attention to the fact that all statements in this conference call may be forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended; Section 21E of the U.S. Securities Exchange Act of 1934, as amended; and the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Regarding such forward-looking statements, you should be aware that Partner's actual results might vary materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are contained in Partner’s press release dated November 12, 2014, as well as Partner’s prior filings with the U.S. Securities and Exchange Commission on Forms 20-F, F-1 and 6-K, as well as the F-3 shelf registration statement, all of which are readily available. Please note that the information in this conference call related to projections or other forward-looking statements is subject to the previous Safe Harbor Statement as of the date of this call. If you have any further questions following the call, please feel free to contact our Head of Investor Relations in Israel, Elana Holzman on 972-54-781-4383. I will now turn the call over to Partner's CEO, Haim Romano. Haim?

[Haim Romano:]

Good day, everyone, and welcome to our third quarter earnings call. As you know our ongoing strategy focuses on technological leadership and innovative market approach and excellence in service and operation. This quarter our strategy proved itself once again. Our postpaid subscriber base has grown for the six quarters in a row, this quarter by 7,000 subscribers. In the last 12 months, our postpaid subscriber base has grown by 42,000 subscribers. Partner also lost the fewest number of subscribers in the last 12 months compared to our major competitors. We lost 56,000 subscribers, all of them prepaid. Wireless telephone lost 83,000 and cell-phone lost 146,000 subscribers. We were the first to launch 4G network Israel and our customers enjoy the fastest cellular browsing speeds in Israel. But the significant gap compared to our competitors. We also offer the best 4G coverage in Israel. Today we have more than 1,000 4G sites and expect to reach 1,200 by the end of the year. The network is currently limited to 5 megahertz, but after the 4G frequency’s tender which is expected in December, this coming December, we hope to provide our customers the full benefits which our 4G network can offer. Our Retail Division excelled again this quarter. Equipment sales were up by 44% compared to the first quarter last year. Compared to the second quarter, sales were up by 7% while maintaining similar profitability. We believe that having the best network in Israel together with value added services that we offer better positions us in the market, which continues to be highly competitive with high churn rates. We are also working on the full scale TV offering. However, the launch of this service will depend on the resolution of regulatory issue. In conclusion, the intense pricing competition in the cellular market continues to impact our service revenue. We are taking different steps to mitigate those impacts. I described the investment in technology and marketing initiatives; in addition, we are also adopting our operating model and improving efficiency and taking measures to cut our costs. I believe that the strategy we have in place is the right one and will bear results going forward. And now I would like to turn the call over to Ziv Leitman for a detailed review of our financial results. Ziv, please.

[Ziv Leitman:]

Thank you, Haim. Before diving into the financial results, I would like to remind everyone the total comparison I discussed in my prepared comments are to the second quarter of 2014, unless otherwise indicated. The cellular market continues to be extremely competitive characterized by very high churn rate and continued price erosion in service revenues from our cellular customers. Total service revenues in the third quarter were NIS 862 million, lest compared to Q2. However, this was due to the fact that the decline in cellular service revenue from our customers was offset by seasonal increase in roaming revenues and the increase in revenues from national roaming services as well as an increase in the fixed line service revenue. Our postpaid subscriber base continued to grow in the third quarter while the prepaid subscriber base decreased by 27,000. The prepaid market continues to contract due to the prevalence of very competitive postpaid unlimited plans. The cellular churn rate reached a record high of 12% compared to 11.4% in the previous quarter as a result of an increase in churn of prepaid subscribers, while the churn rate of postpaid subscribers remained stable. Cellular ARPU totaled NIS 76, unchanged from the previous quarter as a result of the continued price erosion which was offset by an increase in roaming revenues as I just mentioned. We estimate that with the current rate of price erosion and the negative seasonal impact typical of the last quarter of the year, cellular ARPU in the fourth quarter will be lower than the third quarter by a few shekels. Equipment revenues in the third quarter were NIS 240 million, an increase of NIS 50 million compared to NIS 225 million in the previous quarter. Gross profit from equipment sales improved this quarter by NIS 6 million due to both an increase in quantity and a change in product mix. On the expense side in the third quarter, OpEx totaled NIS 657 million, up NIS 50 million compared to Q2. The increase resulted mostly from seasonal increases in direct revenue related expenses such as payment to communication provider. However, we don’t believe that this increase in OpEx represent a new trend and that we will be able to lower the quarterly average OpEx level in the future compared to the OpEx in the third quarter. The number of employees on FTE basis at the end of the third quarter was 3,683. Since we started implementing efficiency measure in the fourth quarter of 2011 the number of employees on FTE basis has been reduced by 4,905 or 57%, mainly by lowering the level of new recruits. Adjusted EBITDA decreased by 3% or NIS 9 million compared to the previous quarter largely as a result of the lower cellular service revenue and higher operating expenses, partially offset by the increase in gross profit from equipment sales. Finance cost in the third quarter of 2014 totaled NIS 50 million, a similar level of the previous quarter. Compared to the last quarter higher losses from FX movement were offset by lower CPI linkage expenses and no one time repayment fees, which was recorded in the second quarter. Profit for the quarter decreased by NIS 6 million compared to Q2, mainly due to the reduction in EBITDA. Free cash flow after interest payment was NIS 106 million in the reported quarter compared to NIS 123 million in the second quarter. The decrease in free cash flow was due to an increase in payment to equipment suppliers and a one-time payment in connection with site leasing, which was mostly offset by a one-time increase in receipts and the absence of a semi-annual interest payment. Should the level of equipment revenues with long payment terms continue, this would likely lead to a temporary increase of working capital. Net debt at the end of the quarter amounted to NIS 2.6 billion, a decrease of NIS 2.2 billion since we started the process of reducing our debt in mid-2011. I will now be happy to open the call to questions. Moderator, please begin the Q&A.

[Operator:]

[Operator Instructions] The first question is from Cathy Schneidman of Citibank. Please go ahead.

[Cathy Schneidman:]

Hi, hello, afternoon, everyone. I have few questions, please. The first one is regarding cost savings. What can we expect further over the next 12 months?

[Ziv Leitman:]

As I mentioned before we think that the level of OpEx in the next few quarters will be lower than the OpEx of the third quarter.

[Cathy Schneidman:]

Of the third?

[Ziv Leitman:]

However, unfortunately we don’t give guidance in specific numbers of the OpEx level. But, no doubt, this will not keep with our efficiency measures.

[Cathy Schneidman:]

Okay. So let me just make sure I understand. You say that in the further quarters it will be lower than this quarter than 3Q?

[Ziv Leitman:]

We estimate that the average expense in the next few quarters will be lower than the OpEx of the third quarter.

[Cathy Schneidman:]

On the third quarter, okay, thank you.

[Haim Romano:]

You will see more efficiency measures.

[Cathy Schneidman:]

Okay.

[Haim Romano:]

Okay.

[Cathy Schneidman:]

My next question is, please, if you can give us guidance for CapEx in 2015 and what share will be on for LTE upgrade and what for maintenance?

[Haim Romano:]

Most of the CapEx will go for two major projects, one is the LTE and advanced LTE, and the second one is the IT transformation from the old system of Ventiv [ph] to the new one of Flexible [ph]. This is also the two projects that we launched in 2012, 2013 and we will go on with those projects. As I mentioned before, we will finish this year with 1,200 sites and continue our rolling of the 4G and 4.5G network next year. Those will be the main investments next year, IT and LTE network.

[Cathy Schneidman:]

Okay. And my last question please is regarding as we approach to the wholesale market, telecom – talking about the TV offer they’re going to launch soon. Do you intend to enter this market or maybe do you have other innovative plan?

[Haim Romano:]

We just two weeks ago – actually a week ago we launched our application on smartphones and tablets and we found that it’s a huge success. Every day we have hundreds of new customers experience the 4GTV and we have the intention to go on and to develop this project going forward. On the other end full scale TV solution will be implemented after most of the regulation issues will be solved by the Ministry of Communication, the wholesale market, the giga issues and other issues concerning the content. We declare this and plus we do everything that we need to do to prepare ourselves. But before the steps that MoC must take to open the market, I think that it won’t be wise from our side to launch the TV as the full scale solution.

[Cathy Schneidman:]

But are you ready now or is it going to take time? Let’s say how much time you’re going to take from there from opening in the market?

[Haim Romano:]

I think it will be faster than the regulator will solve the wholesale market issue.

[Cathy Schneidman:]

Okay. Thank you very much.

[Operator:]

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Romano to go ahead with his closing statement, I’d like to remind participants that a replay of this call is scheduled to begin in two hours. In the U.S., please call 1-888-326-9310. In Israel, please call 03-925-5927. And internationally, please call 972-3925-5927. The recording is also available on the company’s website www.orange.co.il. Mr. Romano, would you like to make your concluding statement?

[Haim Romano:]

Just to say, thank you for participating our quarterly earnings calls. And I’d like to hear from you next time. Thank you. Have a good day.

[Operator:]

Thank you. This concludes the Partner Communications’ third quarter 2014 results conference call. Thank you for your participation. You may go ahead and disconnect.